Secured vs. Unsecured Debt: What's the Difference?

Understanding how different types of debts work can be important when you’re borrowing money or paying off debt. Broadly speaking, there are two types of debt: secured debt and unsecured debt. The main difference is that secured debt requires collateral — assets that the lender can take if the borrower doesn’t repay the loan as agreed.

Learn more about how these two types of debts differ, ways they can impact your credit score and how to choose the best option based on your circumstances.

What Is Secured Debt?

When you take out a secured debt, you must pledge collateral to secure, or guarantee, the loan. If you don’t repay the loan on time, the lender might be able to take the collateral to help settle the unpaid debt.¹

Common types of secured debts include:¹

• Auto and other vehicle loans
• Home equity lines of credit
• Home equity loans
• Mortgages
• Vehicle title loans

For example, if you get a loan to purchase a vehicle, the vehicle you buy will be collateral for the loan. If you fall behind on your payments, the lender can repossess the vehicle, sell it and keep the proceeds from the sale to pay off the debt.

If the lender sells the vehicle for more than you owe, including any repossession fees, then it may need to give you the surplus. But you also may be responsible for a deficiency balance if the sale doesn’t pay off your debt.²

Mortgages and vehicle loans are some of the most common secured debts, but there are also other types of secured debts. For instance, a pawnshop loan uses a valuable possession as collateral. And with a secured credit card or secured personal loan, such as a credit-builder loan, your security deposit is cash that’s set aside in a locked account.

What Is Unsecured Debt?

Unsecured debt is debt that doesn’t require collateral. The lender is giving you a loan or line of credit based on your creditworthiness and your promise to repay the debt.¹

Common types of unsecured debts include:

• Most credit cards
• Most personal loans
• Personal lines of credit
• Student loans

Even though you haven't pledged collateral, there can still be consequences for letting the debt go unpaid. Lenders can charge you fees and report your missed payments to the credit bureaus, which can hurt your credit scores. They can also send or sell your account to a collection agency.

Should I Choose Secured or Unsecured Debt?

When deciding between different types of debt, it can be helpful to consider why a creditor might ask for collateral in the first place.

Sometimes, creditors require collateral because they’re lending a lot of money — that’s what happens when you get a mortgage or vehicle loan. Being able to take the collateral limits the lender's risk of losing money if the borrower can’t or won’t repay the loan.³

Other times, creditors require collateral because the borrower has a low credit score or lack of credit history. Even if it’s a small loan or line of credit, the creditor wants to limit its risk because it thinks that there’s a greater chance the borrower won’t repay the debt as agreed.⁴

In general, if you have good credit, a secured loan might offer a lower interest rate and fewer fees than an unsecured loan.⁴ For example, buying a car with an auto loan could be a better option than taking out an unsecured personal loan to buy a car.

However, secured debts for people who have poor credit, such as a pawnshop loan, might have more fees or higher interest rates than their unsecured counterparts. It can be easier to qualify for these secured accounts.⁴ But, if you don’t need the money right away, you might want to focus on improving your credit before taking on a new debt.

Additionally, consider the pitfalls of taking on secured debt to pay for a want rather than a need. For instance, a home equity line of credit might offer a lower interest rate than an unsecured personal loan. But you might not want the threat of losing your home to pay for a vacation.

Impacts on Your Credit Score

Secured and unsecured debts can affect your credit scores in similar ways. What matters most is how you manage the debt rather than whether or not it’s secured.⁴

Making your payments on time can help you build a positive credit history that improves your credit scores. Conversely, creditors can report late payments to the credit bureaus, which can hurt your credit scores and stay on your credit report for up to seven years.⁵

With both secured and unsecured credit cards, your credit utilization ratio can be an important scoring factor. The ratio is a measure of how much of your credit limit you’re using based on the credit card balance and limit in your credit report. Only using a small portion of your credit limit, such as less than 10%, can be best for your scores.⁶

What Debt Should I Prioritize Paying Off First?

There are different approaches and rules of thought about which debt to prioritize when you’re paying down multiple accounts. But the first step is almost always to make a list of all your debts and their balances, terms and interest rates.

Some people then focus on paying off the account with the highest interest rate first. After you pay off that account, take the money you were putting toward the debt and focus on paying off the account with the next highest interest rate. This approach, called the debt avalanche method, might save you the most money in the long run.⁷

An alternative approach, called the debt snowball method, focuses on paying off the account with the smallest balance first. You might accrue more interest with this method than the debt avalanche method. However, the psychological boost from crossing debts off your list might give you an extra push to stick with the plan.⁷

What Type of Credit Card Is CareCredit?

The CareCredit credit card is an unsecured credit card that you can use at over 270,000 locations for various healthcare services, including LASIK, veterinary, dentistry, cosmetic surgery and more. As with other unsecured cards, paying your monthly payment on time and having a low utilization rate on the card might help your credit scores. Additionally, you can see if you prequalify online to find out if you’re likely to get approved for a CareCredit credit card without affecting your credit scores.

Managing Health and Wellness Costs With the CareCredit Credit Card

If you are looking for an option to help manage your health and wellness costs, consider financing with the CareCredit credit card.* Get the care you want or need with easy, flexible financing options that allow you to pay for out-of-pocket expenses over time. Use our Acceptance Locator to find a provider near you that accepts CareCredit. Continue your wellness journey by downloading the CareCredit Mobile App to manage your account, find a provider on the go and easily access the Well U blog for more great articles, podcasts and videos.

Your CareCredit credit card can be used in so many ways within the CareCredit network including vision, dentistry, cosmetic, pet care, hearing, health systems, dermatology, pharmacy purchases and spa treatments. How will you invest in your health and wellness next?

Author Bio

Louis DeNicola is a freelance writer who specializes in consumer credit, finances and fraud. He has several credit-related certifications and works with many lenders, publishers, credit bureaus, Fortune 500s and fintech startups.